Mickey Schleien: Yes, good morning everyone. Bob, I realize these are not particularly large investments, but I wanted to ask you about the prospects for DKI Ventures and 8th Avenue Food, just asking in relation to their valuation?
Bob Marcotte: Thinking in the inverse order, 8th Avenue Food is a large syndicated position in a buyout business that is in the grain and commodity processing. It is affiliated with what used to be the old Post Foods. It had a tough couple of quarters, but it has — its consolidated its manufacturing and is reasonably solid in the food service business. As a second lien loan in this marketplace, things don’t trade very well and I think that one is probably trading at a relatively low point compared to its enterprise value. Frankly, I’m not terribly worried by that. That is actually a position that is owned by Apollo, and they have significant capital invested in that business. So food service tends to go through some cycles, but it tends to have a long-term horizon to grow that one, that don’t really spend a ton of time on and give you a little color on that one.
In terms of DKI, DKI is a — it’s an environmental kind of a restoration company, kind of like a Bow 4 type of business where it deals with events such as flood storm damage, fire restoration type of obligations. The business has gone through a bit of a transition. It used to be a franchise business with local operations. That franchise platform is morphed to a services, more of a TSP platform. They recently hired some additional resources to expand and grow its network of property owners and managers that they service. The business has a core supply GPO underlying it, which also produces a fair bit of profitability. Because of the current events, whether it’s climate change or otherwise, we seem to have plenty of occasions for that kind of support.
And then given what’s going on in the property market, we see large property managers desperately in need of a consolidated outsourced provider to service those particular incidents when they arise in their managed properties. So the underlying performance of the business has probably trailed what I think is the broader marketplace. We’ve repurposed the marketing side of the business and feel like it’s in pretty good shape. And the underlying sponsors in this case and the founders of the business are continuing to fund money into the business to support the transition that’s ongoing. So it’s a business we are working hard on, but we think the long-term fundamentals supporting the business and the equity ownership is supportive of the business and feel like it’s a small business that has a reason to continue to grow and come out of the situation.
Mickey Schleien: Bob, just a follow-up to that explanation, does quality environmental, the new investment you made operate in the same space?
Bob Marcotte: It actually does not. Quality environmental is an asbestos abatement firm focusing on certain segments of the healthcare and the educational sectors. So it’s more about curing environmental problems that exist, not fixing problems that have occurred, unfortunately.
Mickey Schleien: I understand. Those are all my questions. I appreciate your time. Thank you.
Bob Marcotte: Thanks for calling in Mickey.
David Gladstone: Do we have any more questions?
Operator: [Operator Instructions]. Our next question comes from Kyle Joseph with Jefferies. Please proceed.
Kyle Joseph: Yeah, hey Bob. Good morning and thanks for taking my questions. Just wanted to pick your brain. Obviously, the portfolio has seen some good yield expansion on rates, but kind of give us a sense for what spreads has been doing and the outlook for yield into 2024, given the forward curve? Thanks.
Bob Marcotte: Rates are a tough one, Kyle. Thanks for the question there. When you look at current market, the SOFR 7 type pricing puts rate at low 12s. That starts to sound like traditional mezz or subordinated debt. And what’s happening is there’s a little bit of a convergence and blurring of the categories. If it is a good solid business, you’ll tend to get a little bit more pricing compression, and we’ve seen good sized businesses attract large capital sources and maybe that’s what might have been in the high 6s and the spread over SOFR can be bid down to maybe 6 over. So there’s been about 50-plus basis points of compression for the better credits. And so they’re clearing probably closer to the in the 11s as opposed to other places where it might have been a recapitalization and it might have been a slightly wider.
So I think what’s happening today is buyouts of good credits, good companies are getting a little bit more aggressive if they’re of size. And so what we’re finding is we wouldn’t expect spreads to widen from where they are today. In fact, I probably suspect they will start to contract slightly and we’ll see less of that in the lower middle market. It’s the large funds where they’ve got capital on the balance sheet that they need to be put to work where we’re seeing the most amount of price compression. And that’s not the average for us. What we’re seeing is for us is it’s still in the SOFR 7 range for us. So I would not expect that compression to hit us. Some of our larger credits, we do have a fair number that I said, average over 10%. We may see some compression but we’ll see significant upside in those situations.
So if somebody — if one of our credits happens to be very lowly leveraged because of growth, if we want to recapitalize that business or fund an acquisition, we may see that compression come through slightly. But we’ll get the upside associated with the additional volume. So in the lower middle market, I think you’re going to see slight compression in the larger credits. I think we’re seeing at least 50 basis points in tightening just because of competition.
Kyle Joseph: Got it. Very helpful. Thanks for taking my questions.
David Gladstone: Do you have any additional questions?
Operator: Mr. Gladstone, there are no further questions at this time. I’d like to turn it back to you for closing comments.
David Gladstone: Okay. Well, thank you all for calling in. We certainly appreciate those questions from the analysts. They help us continue to go forward and explain where we are and what we’re doing. But we’ll stop for now, and we’ll see you again next quarter. That’s the end of this call.
Bob Marcotte: Thank you.
Operator: Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.
